Trading the Trend

[ducati916]

So the market still trading strong. The MA crossover still hasn't occurred yet, but it (obviously) will at some point next week now.

The emphasis on this thread therefore is to catch as much of the trend as possible. That is to include:

(a) major pullbacks;
(b) which if successful in (a) should have us out if the trend ends.

So this thread does not purport any particular time frame (but it will not be frenetic) rather trying to avoid major pullbacks. Major pullbacks would be the more obvious ones (below).

jog on
duc

 

[ducati916]

Bullish factors underpinning the trend:

This morning's jobs report shocked the financial world -- most notably the economists whose job it is to provide estimates. The consensus estimate among economists for May nonfarm payrolls was projecting a loss of more than 7 million jobs. The actual number that was reported did not just show a smaller than expected job loss, but it actually showed a gain in jobs of more than 2.5 million.

We're seeing a similar situation play out in the equity analyst community. With the S&P 500 now up 40%+ since its low less than three months ago, the average stock in the index is now trading above its consensus analyst price target that looks 12 months out. Analysts have simply not been able to catch up to the rapid rise we've seen for equity prices.

It's extremely rare to see share prices move above consensus analyst price targets. We don't have the historical daily data on this, but anecdotally we can't remember a time when the spread has been this wide. As shown below, at the end of 2019 when the S&P finished a massive rally, equity prices were 5.5% below the consensus price target. That was seen as a very tight spread prior to what we're seeing now. At the lows in March, the average share price had dropped all the way to $92.50 compared to an average consensus price target of $143.20. That projected a gain of 54.9% at the time!

Since March 23rd, the average share price has risen from $92.50 up to $138.40, while the average analyst price target has fallen from $143.20 to $136. Current price targets no longer project a gain for the average S&P 500 stock, but rather a 1.7% drop.

And

There would (seem) to be a rotation out of Bonds (risk off) into Equities (risk on) occurring. Obviously this is something that we need to keep an eye on going forward.

jog on
duc

 

[qldfrog]

Another great day for DFEN, FAS and Mr Le Duc will celebrate [ with French champagne i hope. ;-) ]
Just wanted to add a note regarding using ETF vs majors..I fully embrace the risk minimization etc but I do not own ERX as the volatility during the recent oil crash scared me
I bought Exxon instead;currently at $53 USD

or in the last 3 months:

vs
ERX last 3 months:

In a nutshell:ERX behaving very well and indeed
from end May XOM went from 37 to 53: 43%
whereas ERX from 10 to 22-> 220 %
Maybe my choice was not that good.....

 

[ducati916]

So trading the 'Trend' is quite a different proposition from trading a market bottom and any resultant bounce(s) from that bottoming process.

Trading the trend for me concerns sectors of the market and the overall market. It is not individual stocks. Individual stocks will respond to their own individual issues. Sectors of the market and the market generally are subject to broader macro-forces.

1. The Presidential Cycle: sounds like a lot of mumbo-jumbo. However, it seems to exist quite strongly in the US markets. Market bottoms tend to cluster in year 2. In year 4, where a sitting President seeks re-election, typically all stops are pulled out to ensure that re-election. The same cycle is still present even in second terms as the governing party will still seek support for their new candidate.

2. Business Cycles: the business cycle is a sub-set of the Presidential cycle. Most will be familiar with this chart:

Above is the current situation (relative to the SPY) of a number of sectors. It can provide a guestimate of where we sit in the cycle (bearing in mind we are now entering the hype of an election) and how it may develop moving forward.

jog on
duc

 

[ducati916]

Historically the Presidential Cycle has a pretty good history: you are looking for weakness in the first 2 years and greater strength in the 4'th year.

I'll add the more recent ones in a separate post. The point is: this is not a guarantee, there are obvious failures (Bush's second term is a glaring example above), simply that this is a further variable that can be assessed when looking at other macro-factors and the various sectors that can be held.

jog on
duc

 

[ducati916]

Skipping Obama for the moment, we jump straight to Mr Trump:

Mr Trump was up until COVID-19 a text book example of the Presidential Cycle. Of course COVID put a nasty dent in his re-election plans. As a sitting President he however wields significant influence in (if nothing else) talking the market higher. The market is certainly responding.

The actual election however is more dependent on the actual economy. On that basis, is he at risk in the election? Of course.

We are now sitting in June 2020. The next President, whoever that may be, will not be sworn into Office until January 2021. The next 6 months will see Mr Trump pull out all stops on the economy. An improving economy (assuming it does improve) will further fuel the market. Bad news or a weak economy will not however necessarily impede the market. Hence, the market is 'relatively' safe until the end of the year +/-. Of course s*** can happen. Which is why we look at other variables. This is simply a (very) big picture view that incorporates some of the political realities of the US markets.

jog on
duc

 

[ducati916]

Clearly the current market has exceeded peoples expectations to the upside. This is simply another way of saying that the market is: overvalued, overbought, overextended technically, etc. That it is due to correct.

There is a further sub-set of people who still consider the (trend) a bounce and that the correction will take the market to new lows.

So we have two different camps: #1 camp expecting a correction in a new bull trend (market ahead of itself) and #2 camp expecting that the correction is a new bear market low. I am in camp #1.

Mr Gartley has posted some Elliot Wave/Gann projections:

I believe Mr Gartley is also in camp #1, using a very different methodology. So we are both waiting for a signal that a correction is imminent.

I have also charted the SPY against a hypothetical Elliot Wave count (as I have no idea about EW).

Now I have no idea whether this is useful. It doesn't help me much I have to say.

Currently I have no signal for a pullback in the trend. However, all the signs are that this current price is extended and will likely correct at some point. I am expecting a pullback to circa the 20EMA. The 20EMA is above its 1STD. It could simply be a pullback to that 1STD or to the 20EMA (which will continue to move higher) intersecting at circa 305-310.

jog on
duc

 

[ducati916]

So some further charts to consider:

With regard to the Presidential Cycle and a sitting President: we would expect the trend to continue quite strongly.

Strategies that are playing well currently:

We are in a 'growth' market. Value is out of fashion currently.

A new metric:

Confirms the deflationary environment. Not a bullish sign for Gold/Silver currently.

And the only chart that suggests a pullback is imminent.


Just add a valuation chart

A pullback, not a new low. That is the overall message of the varied charts.

jog on
duc

 

[qldfrog]

In cases like that @ducati916 Mr Duc, do you just follow your indicators?
..my current position..i still bull until told otherwise by my systems
Or do you start mitigating your risks
Taking options short calls etc even getting out
Or even moving 180 and playing a fall only?
What does your experience tell you?
Only if you have the time and willingness to expand
Obviously last option is do nothing as you believe we are still in an overall bull trend so will just ride the pullback

 

[ducati916]

In cases like that @ducati916 Mr Duc, do you just follow your indicators?
..my current position..i still bull until told otherwise by my systems
Or do you start mitigating your risks
Taking options short calls etc even getting out
Or even moving 180 and playing a fall only?
What does your experience tell you?
Only if you have the time and willingness to expand
Obviously last option is do nothing as you believe we are still in an overall bull trend so will just ride the pullback

Mr Frog,

As this thread develops we will see pullbacks distinguished between pullbacks that are a normal fluctuation and pullbacks that are a significant decline: say 10%+.

I'm not really interested in pullbacks that are simply normal fluctuations. By the time you see the signal, act on it, close your position, it is all over and the market is moving higher. You have churned your position (probably lost it) and is (unless day-trading) a waste of time, money and effort.

I am however very interested in a pullback that has some meat to it. Trading these correctly will add to your bottom line and of course, every-now-and-then, will save your bacon when a cyclical trend within a secular trend, turns really nasty.

The key for me is keeping an eye on the macro-fundamentals that when combining with market technicals signal something (more) serious is on the horizon. The other takeaway is that I work with sectors, not individual stocks. Individual stocks follow their own individual story lines. Sectors move as a group (possibly the odd outlier) and are easier to get a read on.

ATM I have been focussing on the broad market. I will be drilling down to sectors. Mr Rederob distracted me over the w/e so I am behind schedule currently.

jog on
duc

 

[qldfrog]

Thanks for sharing

 

[gartley]

The following charts are Nominal 5, 10 and 20 week cycles for the SP500. As can be seen the 5W target was met and the market then went into consolidation for a few weeks thereafter. The 10 and 20 W cycles considerably higher targets which have not been reached but that is not to say they will be reached and can be invalidated. It should be noted the 10 and 20W target ranges overlap and this range is 3382 to 3769.
Other methods such as prime EW counts suggest a completion is close at hand and as duc said yet various other methods suggest we are overbought at extremes.
For me however as mentioned before, is the absence of confimation that this trend has ended.. What I look for within my cycles routines is an alignment of 8h and daily dynamic cycles. I have tried just 8h but quite often it's only leads to a shallow move. So like recently on gold where we got both an 8h and daily confirmation which led to a substantial move down I am waiting likewise for the same in the stock indices but at the moment there is nothing there and it may not even generate. There is some price detrend analysis which I hopse to post later which suggests this trend has still further to run.
In the case that the market does keep trending and reach the 10W/20W target range there are no higher targets at this point in time.

 

[ducati916]

Personal incomes make a big jump: (see attached document): courtesy of the Fed.

jog on
duc

 

[ducati916]

Laggards on the move. BA a constituent of DFEN:

In recent weeks, we have highlighted how there has been rotation away from the best performing stocks in the first leg of the rally off of the 3/23 low while the stocks that had been the laggards have become the new market must-haves. Boeing (BA) is a prime example of this trend. Heavily connected to the decimated airline industry, BA only rose 15.04% in the first part of the rally from 3/23 to the recent 5/13 low. While not the worst stock in the index during that time, it lagged the Dow Jones Industrial Average which rose over 25%. But along with others in the industrial sector like the airlines, recent performance has been much more impressive with BA up 69.08% from 5/13 through Friday's close. Today alone the stock is up another 11% after rallying 11.47% on Friday and 12.95% last Wednesday! That leaves it at its highest level since early March.

With such large gains in a little less than a month for a stock with one of the higher stock prices in the index, BA has added roughly 575 points to the price weighted Dow. That has by far been the largest contributor to the Dow since 5/13 accounting for roughly 14.9% of the overall move and nearly double the next biggest contributor, Goldman Sachs (GS), which added 316.32 points to the Dow, or roughly 8.19% of the overall move since 5/13. Other major contributors from the Financials sector like Travelers (TRV), American Express (AXP), and JPMorgan Chase (JPM) are some more examples of the recent rotation into stocks that lagged in the immediate wake of the bear market.

In the financials (FAS) the laggards are also helping its move higher. Part of the advantage of trading ETFs is that you will often have a laggard like BA in the portfolio. Would you want to buy BA as an individual stock? The amount of work (assuming you are capable of advanced financial analysis) would be staggering and even then you are probably going to miss by a mile. Far easier to just have it as 1/50+.

Amazingly, the average stock in the S&P 500 is now up 54.7% since the March 23rd COVID-Crash closing low for the index. From the high on February 19th through the low on March 23rd, the average stock in the S&P fell 39.13%. On a year-to-date basis, the average stock is down just 5.13%, while the average stock is down 9.06% since the February 19th all-time closing high in the index.

Here are two other stats that are pretty mind-blowing. First, there is only one stock (COTY) in the entire S&P 500 that's down since March 23rd, and it's down less than 2%. Second, there are only eight stocks that aren't up more than 10% since March 23rd, and these include names like Walmart (WMT), Costco (COST), and Kroger (KR).

Looking at the eleven S&P 500 sectors, the average Energy sector stock is up more than 107.05% since March 23rd. Note, however, that these Energy stocks are still down nearly 30% year-to-date because they fell 60% from February 19th through March 23rd. Consumer Discretionary, Financials, Industrials, and Materials all have average gains of more than 50% since March 23rd as well.

The average Tech and Health Care stock is now up year-to-date, while most other sectors have average declines of 3-6% at this point.

The above is more about buying the bottom. Those returns are available to those that are willing to step into a blood bath.

I'm posting the above for a more practical reason however. A couple of days back I posted this chart:

We have the pre-COVID market, the crash and now the recovery. What phase are we in? Correctly identifying the phase is an important part of the macro-analysis. Through examining the sectors and their current returns and position relative to others, we can start to work out where we are. Thus we start to drill down into sectors and sector rotations. As always, moving forward, we look for divergence from the expected path.

jog on
duc

 

[ducati916]

So we have the macro-cycle. Now we need to drill down into sectors:

The above was from a post in 2008. That is it in a nutshell. That is the roadmap.

The question is where do we start? Do we start from (early) March 2020 pre-crash or post crash? There are arguments for both: I'm going with post crash. The crash will have re-set the various components, not least the consumer. Therefore plug in the values for the current position and just monitor going forward.

jog on
duc

 

[qldfrog]

Based on the phases graph, i am a bit puzzled as i see us sitting now in stage 3 already, whereas the crash was just yesterday.iron ore is high, oil back to its 40usd a barrel mid term target,
We can not have a whole business cycle within a year?
So could we still be in a desorganized end of last bull...which would potentially mean a real crash again to reset the clock...
I would prefer your view of a new bull trend.so far so good and great results last night
.but the market does not care what i prefer..
Tricky

 

[ducati916]

Based on the phases graph, i am a bit puzzled as i see us sitting now in stage 3 already, whereas the crash was just yesterday.iron ore is high, oil back to its 40usd a barrel mid term target,
We can not have a whole business cycle within a year?
So could we still be in a desorganized end of last bull...which would potentially mean a real crash again to reset the clock...
I would prefer your view of a new bull trend.so far so good and great results last night
.but the market does not care what i prefer..
Tricky

Stage 3 looks about right. Going back to the earlier chart, we can see in the last column:

Currently the market is a little out of sync. There will be sector rotations going forward. Eventually we'll see (more or less) where we are. We can also drill down further into the various sectors, which might provide greater clarity.

However for 'timing' the broad market, inter-market relationships are paramount.

Above we have the 20yr Bond v SPY. I'll only go into detail of the last signal Dec.2019/Jan 2020.

The signal (above) was triggered in late Jan.2020, but the initial warning came in Dec. 2019. In Dec. 2019 the 20yr was trading at a yield of 2.25%. In Jan. 2020 that yield was 1.83%. That is a 42 Basis point move. That is significant. You can see the effect on the break of the trendline in late Jan. 2020. Below is greater detail:

By Feb. 18 2020, no doubt remained: the market was going to correct. This wasn't going to be just a pullback to the 20EMA type of correction, but more akin to Dec. 2018 (see above chart for that time period). Of course I wasn't expecting the crash that ensued, but by that time I was already light and hedged, so it made no difference. By April 2020, we could see a perfect H&S in the ratio, which along with everything else provided confidence moving forward into the bounce and holding positions.

I haven't drawn the horizontal support: but we can see, where we are currently lines up with the March period. Combine that with the current over-extension on any number of indicators and we are probably due a correction: probably to the 20EMA.

The above chart is just looking at the 2018/2019 drop. In May 2018 the 20yr yielded 2.19%. By October the yield was 3.30%. A 17 Basis pt. move. The Fed. was hiking and it was well publicised. Go back to the ratio chart for that time period: look at Oct. 2018. Clear trendline break, combined with bad Fed. language and a 17 Basis pt. move. The market was going to correct.

This macro perspective (usually) gives ample warning. Combine it with additional analysis and you have plenty of warning of troubled waters ahead.

jog on
duc

 

[ducati916]

The $VIX:

You'll have to excuse a couple of my lines (could have been more precise). I have also omitted the horizontal lines (resistance/support) entirely because this particular chart is just a short history. You would want a longer time frame to plot the horizontals on.

I use the VIX in combination with other indicators (probably about 4 in all). Mine are obviously not coded (big disadvantage, far more time consuming having to look at stuff) but you can still get there (even if you can't code) and have a pretty good idea what is going on.

Obviously (or maybe not so obvious) you can use the VIX in both directions (as Mr Skate is doing). There is a significant amount of information contained in this (seemingly) simple indicator. Clearly from the posted backtests, the advantage is clear.

So a practical application currently: look to far right of the chart. You will see that the steepness of the blue line is unlikely to be maintained. Any fluctuation now will create a 'break' in the trend line. This will in the current market trigger the 'pullback' that a number of posters have been talking about for the last week. Note also, had horizontal lines been added, the falling VIX would be at +/- the support point and would likely rally, which means falling prices in stocks.

Today, we have a bit of a pullback. Is it a pullback or failing (bounce) trend? It is simply a pull back because the other indicators do not confirm a trend (significant) failure.

But that identifies an important point (that Mr Skate has solved via code): how do you differentiate a 'signal' from noise? This takes some effort and is tricky in isolation. I use other confirmations, but you will have to find something that gells with your style of trading.

Clearly some of what I use appears on this thread, 'Trading the Bounce' and 'Market Bottoms'.

Currently we have this situation:

The 50/200 is still rising. What is pulling back is the 20EMA which was extended. Now of course that could develop and by then you are already caught. Hence the starting point are the macro indicators.



jog on
duc

 

[qldfrog]

Fwiw, my indicators moving to bear.
Asx daily switching to a bearish .

 

[Joules MM1]

Fwiw, my indicators moving to bear.
Asx daily switching to a bearish .

so not actually in bear mode, more a transition, more an interpretation that leans to bear ?